2019 results in line with our expectation
China Construction Bank’s （CCB） 2019 revenue rose 7.1% YoY toRmb705.6bn, and attributable net profit grew 4.7% YoY toRmb266.7bn, in line with our expectation.
Trends to watch
2019 revenue solid; NIM mildly narrowing and capital strong. Dailyaverage NIM fell 5bp to 2.26%, and we attribute this to rising depositcosts. Management expects NIM to narrow 10bp YoY in 2020 due tofalling yields of assets. Net fee income rose 6.8% YoY in 4Q19 and11.6% in 2019, the fastest since 2014. We expect fee income growthto decelerate due to COVID-19. CT1 CAR rose 5bp to 13.88%, one ofthe highest in the sector.
Asset quality continuing improvement since 2015. End-4Q19 NPLratio fell 1bp QoQ to 1.42%. 4Q19 net NPL formation rate was 0.68%（-27bp YoY and -31bp QoQ）。 SML ratio rose 13bp HoH to 2.93%, whileoverdue loan ratio fell 28bp HoH to 1.15%. Most leading indicators ofasset quality improved. Provision coverage ratio rose 9.4pptsequentially to 227.7%, recovering to the level of 2014.
2020 outlook: Loans to grow 10%; NIM to narrow 10bp; cautiouslyoptimistic about asset quality. During the results briefing,management guided 2020 credit lending at Rmb1.5trn, implying 10%YoY growth. The bank plans 51% of lending to be retail loans, whilecorporate lending may focus on healthcare and infrastructureconstruction. Given falling asset yields and the low probability ofsignificant declines in deposit costs, the bank expects NIM to drop10bp in 2020. The bank thinks COVID-19 could hurt asset quality, butthe actual impact depends on how long COVID-19 lasts and its impacton China’s macroeconomy. The bank aims to control the proportionof clients requiring deferred payment to less than 6% （vs. target ofless than 5% at ICBC）。 The overdue loan ratio fell MoM in March.
Financials and valuation
We raise our 2020 and 2021 revenue estimates 2.5% and 4.2% onhigher fee income growth, but maintain net profit growth estimateunchanged due to prudent provision charges. CCB A-share is tradingat 0.7x 2020e P/B, and H-share at 0.6x P/B. Maintain OUTPERFORMon A-share and H-share with TP at Rmb9.13 （1.0x 2020e P/B with41.1% upside） and HK$9.60 （0.9x 2020e P/B with 53.8% upside）。
Risks
Sharper-than-expected economic headwinds from COVID-19; sharpfluctuations in domestic asset prices.